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I always install SP3 manually, never had any issues at all.
Why don't you just unplug your modem or router when you are not using it? That's what I do. It gets unplugged every evening before I go to bed and usually doesn't get plugged in again until I get home from work the next day and need to check the internet.Hackers can't break into your computer if there is no connection to the outside world.Shaves a few cents on your electricity bill as well (every little bit counts).
Why don't you try another SP3, did you ever think you might have gotten a bad copy? The one I have is an ISO that I downloaded from the internet. I have never had a problem installing SP3, and I like XP, even though I run Linux on all my PC's. Like I said, I use it for WinUAE, simply because I like that emulator better than the ones offered in Linux format.